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I have a modeol which I'd like to ultimately trade on a propritary basis but may also be good to land an an alpha stream. It trades a single instrument using a stat-arb type of underlying strategy. The instrument has limited daily volumne; ~2mn shares, average ~300k turnover.
In terms of managing how much of that liquidity I take. What's the suggested approach? My current thinking is that I'll build a custom portfolio consutruction model that will use a rolling window of average daily volume and then only take a threshold of that; i.e. basically equal-weighting + a cap. I suspect it would need to be tuned out of sample so as to determine the point at which the market makers get their panties in a twist... Or, is this better handled by a custom execution model that tries to take a certain amount of stock within a bounded price and time frame?
Do I need to bother with this for an AlphaModel? My understanding is that we generally only need to emit insights there and I'd prefer to keep that alo as pasimonious as possible given it probably needs some human based analysis/review.
Douglas Stridsberg
Presuming you mean "do I need to bother with this for an Alpha Stream" and I can't answer for that.
Regarding general strategy development, I would probably personally opt for implementing a volume cap in the portfolio construction model or the risk management model. The execution model is only responsible for taking orders from the portconst/riskmodel and executing them, so it's not a good place to artificially limit the number of shares bought, in my view. The number of shares to buy should be given once the order reaches the execution model.
As a reminder, the order is as follows: alpha model -> portfolio construction -> risk management -> execution.
Ian Larson
Does it only trade a single instrument, period?, or does it only work on multiple small-cap securities? In either case it may not be much use to institutions, which are what I'm understanding to be the consumers of alphas, because they may not actually be able to pull much profit from it? May be better to trade it yourself on a proprietary basis
Jared Broad
Ian's comment is correct that low volume alphas can't attract the same licensing fees; but are still worth submitting. There are a large variety of institutions monitoring the market and they don't all have a mega-fund mindset. Some of the smaller funds might be quite happy deploying to a high return low volume alpha.
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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